GST and it’s Impact on Employer, Employee

A specific exemption was notified under service tax for services rendered by an employee to an employer. Employees all over the country should be relieved that the same exemption has been continued as the opening entry in Schedule III of the Central Goods and Services Tax (CGST) Act — services by an employee to the employer in the course of or in relation to his employment shall never be treated as supply of either goods or services.

As far as the employer is concerned, Schedule I of the CGST Act states that gifts not exceeding Rs 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. There was some confusion in interpreting this clause. The Ministry of Finance has issued a clarification through a press note that reads as follows:

“It is being reported that gifts and perquisites supplied by companies to their employees will be taxed under GST. Gifts up to a value of Rs 50,000 per year by an employer to his employee are outside the ambit of GST. However, gifts of value more than Rs 50,000 made without consideration are subject to GST, when made in the course or furtherance of business.”

The question arises as to what constitutes a gift. Gift has not been defined in the GST law. In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift. Another issue is the taxation of perquisites.

It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows there from that the supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.

Further, the Input Tax Credit (ITC) Scheme under GST does not allow ITC of membership of a club, health or fitness centre [section 17 (5) (b) (ii)]. It follows, therefore, that if such services are provided free of charge to all the employees by the employer, then the same will not be subjected to GST, provided appropriate GST was paid when procured by the employer.

The same would hold true for free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (C2C).

At a time when the government is issuing a plethora of notifications and circulars under GST, the reason for issuing a press note to clarify this issue is not clear. Taxpayers would prefer to have a notification or a circular that they can refer to and quote when necessary.

Yet, the press note does not resolve the issue completely. The HR departments of companies are going to maintain they every payment received by an employee from an employer arises from the employer-employee relationship.

The press note mentions that providing membership of a club, health and fitness centre free of cost or providing free housing would not be taxable. These supplies would not be taxable in any case since the inclusive definition of supply uses the word for a consideration.

An issue that arose during the last stages of the erstwhile service tax regime was that the tax department was under the impression that buyout of the notice period was a service that was rendered by the employer to the employee.

The reasoning they gave for this was the strangely worded “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”.
No definitive conclusion was reached on this during the service tax era. This sentence has been repeated in Schedule II to the CGST Act as a supply of services – this would mean that this issue may arise again under GST.

The press note clarifies that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST.

A stand can be taken here that even a buyout of a notice period is as per the terms of a contractual agreement between the employer and the employee and hence would not be eligible for GST.
Since the advent of GST, the government has gone on an advertisement blitzkrieg propagating the positive aspects of the law. A number of questions are also being answered through the notifications, circulars, press notes, advertisements, twitter feeds and public announcements.

It would appear that there is an overdose of information through various channels. Some of the responses given on Twitter are being questioned as being incorrect. Since the issues under GST are not going to vanish overnight,

the Central Board of Excise and Customs (CBEC) would do well to stick to the notification/circular route to clarify various issues.

The CBEC should come out with a master circular that clarifies the taxability or otherwise of all possible transactions that could take place between an employee and an employer. The press note does not help one to understand what could be considered to be a gift.

Employees who have car leases from their employers are already having to take a hit in their take-home pay due to the increase in the rate of taxes on car leases. The HR departments would do well to take a relook at their employment contracts.

They may want to include all payouts and benefits to employees under the umbrella of cost-to-company in order that no transaction takes the colour of a gift in excess of Rs 50,000. They would need to balance between incentivising employees through innovative means and ensuring that the transaction does not meet the definition of supply.